HR IS A PROFIT CENTER, AND HERE’S HOW TO PROVE IT - CiteHR
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Dear all,

This is an article by Dr. John Sullivan and Master Burnett.

Cheers

Rajat







The goal of every corporate department head should be to become the leading “profit center” for their corporation, however most people in HR accept the notion that their function isn’t capable of generating a profit and is therefore doomed to be an administrative cost center. Unfortunately, that pessimistic view has become a self-fulfilling prophecy for too many organizations. From an advisors perspective, more than two-thirds of the established HR functions in existence today are incapable of demonstrating a measurable impact on corporate productivity or profitability by design. In an era where attempts to differentiate the products and services from one firm to the next have become increasingly reliant on human elements such as customer service it is sad that more human resources functions have not emerged from the backwater that is administration. Times have changed, and now more than ever it is easy for human resources to demonstrate the economic value of it programs and policies.

Focusing on Cost Containment is Less Strategic than Driving Revenue Growth

For the past decade the human resource function has operated under the myopic focus that process efficiency was the most critical deliverable in the enterprise. While this misguided focus can be partially attributed to external pressure from the finance function and the budgeting process, such pressure can in most cases be evaded by proactively developing the business case for all activities undertaken in HR. Unfortunately, developing a business case rarely happens and instead, the human resource function continues to make trade offs between quality and cost that carry on the lowest common denominator of deliverables at a slightly lower cost. This never ending focus, while easy to accomplish and attractive to some, fails to address or solve critical business problems facing the organizations that could be remedied via HR. Cost containment is much like periodically replacing water stained acoustic ceiling tiles versus calling out a roofer to fix the root of the problem; in the end replacing the tiles periodically will cost you much more.

The other way to look at cost containment in HR is that of a race car spinning its wheels; it requires a lot of effort but produces little result. When cost containment efforts are first undertaken the results can be fairly significant, however as time passes and the efforts continue the value of the savings diminish. Today, cost containment efforts pertaining to the activities of the human resource function impact such a miniscule portion of the overall corporate budget, that the savings produced are insignificant to say the least. This is because the total HR budget in many organizations is less than 4% of all corporate expenditures.

While it is true that HR receives only a small portion of the total corporate budget it is charged with managing the programs, policies, and infrastructure governing the resources that on average are allocated 60% of the total corporate budget, the workforce. Which makes more sense, achieving a 7% cost savings on 4% of the total corporate budget, or a 1% growth in return on 60% of the total corporate budget? The answer should be clear, check out the math below based on a real professional services firm traded on the New York Stock Exchange!

Assumptions:

· 2004 Revenue: $2,262,200,000

· 2004 SG&A Expense (Budget): $2,142,900,000

· 2004 HR Budget: $69,000,000 (3.2% of total budget)

· 2004 Salaries & Benefits: $1,208,922,000 (56.4% of total budget)

· 2004 Return on Salary & Benefits Expense: 5.4%

The Math:

· Value of 7% Reduction in HR Costs:

o 7% X $69,000,000 = $4,830,000

· Value of 1% Workforce Productivity Gain:

o 1% X $1,208,922,000 = $12,089,220

That’s a difference of $7,259,220!

How to Demonstrate the Productivity, Revenue and Profit Impact of Specific HR Activities

It's not enough to "believe" that HR activities and programs actually work; you must also be able to demonstrate to any critics (particularly the CFO’s) satisfaction that they positively impact employee productivity, revenue and profit. Unfortunately, most HR professionals go about proving that impact the wrong way. The process of demonstrating business impact should start by assessing all current HR programs to establish a baseline and foundation point for future analysis. Once you have caught up, then step two is to keep current by evaluating all newly proposed programs using the same process.

General Tips for Proving Impact

There are four basic ways to provide "dead bang proof" that a program works. Each is similar to the way a new drug gets tested or that new ads and new products are tested. The most effective ones are listed first.

1. Split sample contrast -- Use a split sample or a control group. Instead of applying a new HR program to the entire team or division, apply it to only half to demonstrate the relative impact of the program

2. Before and after contrast – Measure employee performance just prior to program implementation and again after implementation, show the contrast in performance.

3. Demonstrate a correlation -- Show a direct correlation between the increased usage of a tool by managers and employees and an increase in productivity, revenue or profit. Also demonstrate that when usage goes down, so does productivity

4. Results after implementation -- Show that employee performance is high immediately after the program is implemented (In this case you do not have “before” performance data (as in #2) for precise comparisons)

Examples by Function

Training

· Split the sales team and provide one half of the sales team with increased sales training. Do nothing to the other half. Contrast the difference in sales between those with increased training and the sales people without the additional training

· Demonstrate that there is a high correlation or connection between the number of hours a worker receives in training and their productivity

· Show that lower training hours correlates with increased error rates, accidents and lower product quality. Calculate the costs of errors and accidents to prove the business impact

· Assess worker performance before training and then show that worker productivity increases immediately after they receive training

Recruiting

· Demonstrate that newly hired workers produce more than the average worker (i.e. one already on staff) by directly comparing their productivity in jobs where output is easily measurable. For example, demonstrate that the sales people you hire under your "recruiting system" produce significantly higher average sales than your current employees. Next calculate the dollar differential in output between the new hires and the average existing employee. Next multiply that dollar differential amount by the number of new hires, to show the overall revenue impact that new hires have

· Run a "pilot" employee referral program in one isolated division and demonstrate the decreased costs and increased quality of hires that result from the pilot program

Compensation

· Show that giving a worker a 10% raise increases their productivity by more than 10%

· Provide evidence that, as the percentage of your employees pay that is tied to performance increases, so does their output and productivity

· Demonstrate a correlation between high pay and high productivity. Show that highly paid workers produce more than the dollar value of their wage differential (between them and the average paid worker)

· Calculate the ratio of the dollar value of employee output per dollar spent in compensation and benefits. Compare the difference between this year and last year. Show that you are continually getting more for your compensation dollar and also demonstrate that your output per “comp dollar” is significantly higher than your competitors

Employee Relations

· Demonstrate that “problem employees" and bottom performers increase their performance and become “average or better" performers within a year after employee relations works with them.

· Prove the correlation between “highly rated" (by employees) managers and productivity by showing the percentage increase in productivity that occurs when a highly rated manager replaces an average rated manager in a business unit (and vice versa). Next, show that your employee relations and training efforts significantly increase the “rating" of previously poorly rated managers

· Demonstrate that your “bad manager" identification program identifies, fixes or removes bad managers months faster than the industry average

Work Life Balance

· Demonstrate that as the percentage of workers that take advantage of work life balance programs increases, so does the productivity in their department or division

· Show that the retention rates of employees increase as work life balance usage increases. Calculate the dollar impact of keeping key employees months longer

· Ask new hires "why they took the job" and demonstrate that the top hires took the job primarily because of your work life balance offerings

· Ask top performers (three months after termination) "why they left" to demonstrate that an a lack of work life balance programs wasn’t a significant factor in their decision to leave

HRIS

· Demonstrate a positive correlation between the increased availability of online HR "answers". And conversely, a decrease in the amount of “wasted hours” that employees and managers report that they spend “looking" for answers within the HR department. Calculate the economic value of reducing those "wasted hours"

· Demonstrate HRIS’s effectiveness by showing the increased accuracy of "HR answers" that are provided on the firm’s Internet site, as compared to the answers received from (the significantly more expensive) HR generalists

Concluding Advice

CEO's are laser focused on the results that their board of directors holds them accountable to. As a result, VP's of HR can make the transformation into a profit center more visible by identifying exactly what their CEO is measured and rewarded on and internally branding or highlighting their related successes. To insure that your analysis passes muster, build an alliance with the finance function, after all they are responsible for measuring ROI. Develop your profit center plan in conjunction with the CFO's office. Be eager to learn about metrics and how to measure and report things the way finance professionals do. Be equally willing to teach the CFO about the impact that motivation, training, recruiting and retention can have on increasing employee productivity and company profit. If you include each of the critical success factors in your plan you will see that HR will be transformed from a backwater "overhead" function into the #1 internal contributor to increased productivity, revenue and profit. The time has come for HR to become the “next" corporate hero… are you up to the challenge?
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Hi

Interesting article. Particularly the 4 general tips to prove the value of HR activities that add profit.

Shame they are potentially wrong!

Here's why:

General Tips for Proving Impact

There are four basic ways to provide "dead bang proof" that a program works. Each is similar to the way a new drug gets tested or that new ads and new products are tested. The most effective ones are listed first.

Proper use of control groups requires you to account for all the possible factors affecting that which you are trying to measure. Usually training practitioners and managers alike will assume there is just one factor - the presence or not of training, and so emply a single control group. In reality there is ALWAYS more than one factor at work, even if they only have a very small influence - you need to have 4 groups for 2 factors, 8 groups for 3 factors, 16 groups for 4 factors and so on, to be able to ISOLATE the impact of these other factors. When the financial trading position is comfortable this flaw is unlikley to be questioned. Come up against a CEO who really understands statistics and design of experiments (as I once did) and you'll soon see the error of your ways!!

This will only prove one thing - the value of employee performance (assuming your measurement system is any good) at the time it was measured. It WILL NOT show the CAUSATION between performance and training. And correlation is NOT CAUSATION - you cannot assume that a change in one (i.e. training happening) caused a change in the other - this is especially the case if the change in performance happens quite soon after the training taking place - this is a basic facet of the dynamics of systems - a change in the input to a system takes an amount of time to be felt at the output of a system - in this case trying to change behaviours (by changing or introducing new training) will take time to be expressed (if at all) as a change in performance. If you don't know your system very well (and very few do!) then you don't know what this delay length is. So again, you are guessing at the impact of training. For more on this concept see the work of Dr John D Sterman and the System Dynamics Group at MIT.

.

See my comments above!!

Again, see my comments above.

Having said all this if the client is prepared to accept evidence from the above techniques as proof of the value added by training, then great. Just don't be surprised if (when?!) performance drops off at some point later in time - it will only go to show that the training either hadn't tackled the root causes (and you had just been lucky!) or that the training's impact wasn't robust enough to deal with the changes.

This may sound like heresy, but I have been working on just such these issues for some time - why? Because I once used these methods to try and prove the value added (and I had an Engineering Systems degree so the maths was hardly beyond me!!) and I was not able to. I had my job terminated.

Best wishes

Martin
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